Bloomberg News

Chile May Keep 5.25% Rate as GDP Growth Allays Europe Concerns

November 18, 2011

Nov. 15 (Bloomberg) -- Chile’s central bank will probably keep its benchmark interest rate unchanged today as rising inflation and faster growth allay concern about the impact of Europe’s debt crisis on the world’s largest copper producer.

The five-member policy board, led by Jose De Gregorio in what is scheduled to be his last meeting as bank president, will keep the overnight rate at 5.25 percent, according to all 15 economists surveyed by Bloomberg. The bank announces its decision after 6 p.m. Santiago time.

The highest interest rate in more than two years gives the central bank the flexibility to ease policy should Europe’s sovereign-debt crisis cause the $203 billion economy to slow. The bank may wait until 2012 before cutting rates as inflation is nearing the top of the bank’s target range and economists surveyed by Bloomberg forecast 6.3 percent growth in 2011, the third-fastest pace among Latin America’s major economies.

“Doubts remain about how fast things are decelerating, particularly consumption, and the labor market is quite tight,” Matias Madrid, chief economist at Banco Penta in Santiago, said by telephone yesterday. “But yes, the economy will slow, and most probably reductions will come.”

In a separate survey of 61 economists conducted by the central bank and published Nov. 9, the median estimate was that policy makers will keep the overnight rate at 5.25 percent this year before cutting to 4.75 percent by April. They raised borrowing costs five times in the first half of the year before holding at their July 14 meeting.

The bank last cut rates in July 2009 -- a year when Chile’s economy contracted for the first time since 1999.

Region, Chilean Demand

Brazil, which is Latin America’s largest economy, reduced its key interest rate 50 basis points in each of its last two meetings to 11.50 percent, citing a need to mitigate the impact of a global economic slowdown.

Elsewhere in the region, Peru’s central bank last week kept its benchmark rate unchanged for a sixth month, Colombia on Oct. 28 kept its overnight rate unchanged for a third straight meeting while Mexico has been on hold since July 2009.

Even as the country’s economy accelerates amid global financial market turmoil, prices for copper -- the industrial metal that accounts for more than half of Chile’s exports -- fell 20 percent in the year through Nov. 11 to $3.483 a pound.

According to a survey of 19 analysts conducted by Chile’s government copper commission, known as Cochilco, the metal will average $3.62 a pound next year, down from a forecast of $4.19 a pound in the commission’s August survey.

Since the beginning of August, Chile’s IPSA stock index has declined 3.6 percent, while the country’s peso has weakened 8.6 percent, the third-worst performance against the dollar among the seven major Latin American currencies tracked by Bloomberg.

Prices, Expectations

Chile’s economic growth accelerated to a year-on-year pace of 5.7 percent in September from 4.6 percent in August. The September figure was above the forecast of 13 of 14 analysts surveyed by Bloomberg.

Unemployment was 7.4 percent in the three months through September, down from 8 percent a year ago, and retail sales increased 9.6 percent in September from 2010, the National Statistics Institute said Oct. 28.

Chile’s annual inflation rate rose to 3.7 percent last month, the highest since April 2009 and up from 3.3 percent in September, the institute said Nov. 8.

The central bank targets inflation of 3 percent, plus or minus 1 percentage point over a two-year horizon.

According to the central bank survey of economists published Nov. 10, inflation this month will slow to 0.1 percent from 0.5 percent in October. The same survey showed that economists’ expectations for 2012 year-end inflation were unchanged at 3 percent for a fourth month.

‘Necessary Flexibility’

Gross domestic product, which expanded 8.4 percent in the first half of the year, will expand as much as 6.5 percent in 2011 before slowing to between 4 percent and 5 percent next year, President Sebastian Pinera, an economist trained at Harvard University in Cambridge, Massachusetts, said last week.

“The average growth rate for the world in 2012 probably will be less than half of what it has been during the past four or five years,” Pinera said at an economic forum in Santiago. “We have to face that reality and prepare.”

The central bank may change the orientation of monetary policy if the global economy deteriorates and causes Chilean growth and inflation rates to fall, policy makers said in a statement accompanying last month’s decision.

“We are paying close attention to external developments and we have the necessary flexibility to act whenever necessary,” De Gregorio said in an Oct. 19 speech in Santiago. “It is important for monetary policy not to react too little, too late. But just as important is that it does not act haphazardly.”

--Editors: Robert Jameson, Philip Sanders

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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